Aviat Networks, Inc. Q3 FY2026 earnings call

US Market Outlook

• Reason for optimism in coming quarters with increased visibility on MDU opportunity. MDU: increased confidence in Tier 1 customer commitment, secured favored position as supplier of choice, installations ongoing in Q4 with larger step up expected in fiscal 2027, and next-generation offering validated.
• Growing demand from utilities due to AI build outs and BEAD program. Utilities: strategic focus on growing presence with product innovations, $1.4 trillion capital spending plan over 5 years for utilities, utility segment approaching 10% of overall business.
• BEAD program: customers signal purchase orders to begin mid to late 2026, 46 of 56 states/territories signed award agreements, funding allocation to wireless access between 10%-15%, largest ramp purchase orders likely in 2027.

Product Roadmap

• Took North American all-indoor radio to international markets.
• Bringing Pass-a-Link radios to North America in early fiscal 2027, addressing an addressable market of over 250 million.

Total revenues for the third quarter were $100.0 million. North America accounted for $46.2 million (46.2% of total revenues), while international revenues were $53.8 million (53.8% of total revenues). Adjusted EBITDA was $4.4 million. Non-GAAP BPS was six cents. Inventories were lowered by $4.0 million versus the December quarter. The trailing 12-month book-to-bill ratio was greater than 1.0. Quarterly results were impacted by the Middle East conflict with approximately $9 million in revenue pushouts from certain project pushouts and unfavorable end-of-quarter demand shifts in several Tier 1 customers.

Updated fiscal 2026 full-year revenues to be in the range of $428 to $440 million. Full-year adjusted EBITDA to be in the range of $35 to $40 million. Q3 challenge was timing-related due to Middle East conflict, but Q4 expected to see seasonally strong revenue and EBITDA margins return to normal levels.

Middle East Conflict Impact

• Caused certain project pushouts and unfavorable end-of-quarter demand shifts in Tier 1 customers, totaling ~$9 million in revenue.

Freight and Supply Issues

• India's jet fuel situation impacted freight costs.

Geopolitical and Supply Chain Risks

• Global supply chain disruptions and geopolitical factors could affect business operations and revenue.

Q: Hey, guys, thanks for taking my questions. Pete, just want to start with that 9 million in pushouts. Do you expect to recognize those orders here in Q4?

A: I think some of them, and look, we want to be conservative with respect to looks like there was more conflict today. I would say some of that has already has already shipped. And we're just, you know, at the, you know, in the March timeframe, some of the tier ones got conservative and we just want to be careful about potential repeats. So that's why we guided the way we did. I can definitively say some of that has already, you know, shipped in the first two weeks of the current quarter.

Q: And then looking at the MDU opportunity, it definitely sounds like you guys are making great traction there. Can you remind us how we should think about the size of this opportunity?

A: Yeah, let me just give a little more flavor. So we have live deployments in more than five markets. All of those markets are open for sale. The size of the opportunity is going to be tied to the all-important number of subscribers that sign up. Early indications are favorable. We see with those deployments an opportunity for additional services and insight and work. we would be comfortable saying it's an eight-figure opportunity in fiscal year 27. Now, the problem with that is eight figures goes from $10 million to $99. I think that's where we're comfortable saying eight. And over the next two or three months, we think we can be more exacting in how big of that opportunity. It's the most exciting growth program in Aviat, and we're totally focused. We'll say eight figures for now, and I would say that when we get through our year end and we incorporate this into FY27 guidance, we can be more specific and give you a more narrow range, Jason.

Q: just last one for me and i'll jump back into Q last quarter you highlighted highlighted some nice traction with your LTE router just curious where that pipeline is today and what what you've seen over this past quarter.

A: yeah so you know our upgrade on the presale T router. We feel really good about it. We're on track for the overall appraisal business to exceed 50% bookings growth this fiscal year. We're also starting to attach incremental software and accessories to our product sales. We're seeing expansion across all segments, including utilities, oil and gas, public safety, and all geographies with strength in North America and Europe. The police applications are small but growing, and we've received initial orders in public safety in the US, Europe, and Latin America. That was a, you know, the platform for this is a small, was a small acquisition, so it's a small base, but it's growing. And to put this in context, you know, microwave backhaul is, you know, let's call it a slow growth market when something like the Middle East conflict happens. It's tough, and we really feel our growth program and fixed wireless access around MDU, the APRISA platform for public safety and utilities, These are the things that are going to permit us in FY27 to outgrow the microwave market.

Q: Hey, Pete, maybe just to dive in in terms of the guidance, it sounds like we had 9 million pushouts, some of which has shipped already into the fourth quarter, but it's still a pretty wide variance out there of 109 to around 121 million. I'm wondering if you gave us some of the puts and takes. It sounds like the Mideast continues to be a little bit of a headwind there, but I'm kind of wondering, you know, what you see at the higher end of the range and lower end of the range. And as part of that, the gross margin sounds like that starts to recover with some utilization. but I'm wondering if you could clarify a little bit more. It sounds like you're talking about it returning more to normal levels.

A: Hey, Scott, this is Andy. Good to hear from you. I'll just start with the gross margin part. You're exactly right. You know, our year-to-day gross margin, 32%, you know, plus... Once we get back to normal volumes, Q4 is our best quarter seasonally, so we expect to have a good Q4. Once we're back at normal volumes, you're going to see, again, expected performance in gross margin. And just to reiterate, we didn't see gross margins drop due to price compression, not at all. Again, price is in good shape. We just have to get back to expected volumes. Okay. And then with the range, so we want to – you know, and let's say we have the same end of quarter dynamics where tier ones push out and, uh, we're not able to, uh, get stuff into the middle East. And, you know, today in India, they said they had a, a jet fuel. Um, so we're hedging on, on that. Um, you know, so, so that's why there's, uh, the range and just, you know, for a company at our scale, it's, uh, it's harder to deal with these risks, and we want to, you know, not have the difficulty in achieving the expectations we set at the end of the June quarter. So that's why there's the range. We, you know, obviously we want to do as well as we can to deliver on the higher end, but we want to be conservative and acknowledge the environment as it is.

Q: just in terms of the gross margins, in terms of how you're managing memory and incremental freight costs now. So are you still comfortable with maintaining that gross margin outlook given the current pricing environment that we're seeing there? And maybe a quick follow-up on the balance sheet as well. Small improvements again this quarter. I'm wondering if there's a longer-term target that you could give us in terms of expected free cash flow that you'd be able to generate in terms of working down DSOs and improving inventory turns?

A: Sure. So I'll start with the gross margin. And to your point, you bring up the usual suspects in terms of, let's call it inflationary items. Again, this company works very diligently in terms of offsets to inflationary items. So again, that comes down to negotiating power in terms of commodities, all the way down to utilization, let's say, in terms of our efficiencies internally. So again, we work diligently in terms of looking for offsets to normal inflation items. You might hear from your other coverage universe. In terms of balance sheet, yes, we still see a lot of greenfield opportunities in terms of addressing both our accounts receivable, accounts receivable in terms of aged accounts are really next on our barometer. We expect unbilled to continue to come down. We have good traction. Two quarters in a row, which means we've cracked the nut in terms of the equation of how to attack that. That's good. We expect inventories to continue to improve. It all drives basically cash flow that should exceed adjusted EBITDA. So that's what we're shooting for. And we see clear daylight in terms of next number of quarters continuing this trend. We don't expect it to end.

Q: Nokia, you know, there's been hearing out there that in terms of their timeline and expected divestiture of the wireless transmission business, that's creating some opportunities for other vendors in Europe and elsewhere. I'm wondering what you're seeing on that front. And also, I've gotten some questions as it relates to Nokia's FWA business, being sold to Insego, how that impacts you. And secondly, just in terms of the MDU opportunity, are there any other technical milestones that you need to hit at this point where we're good and we're just kind of waiting for the MDU customer to start to ramp?

A: Yeah. So... There's no more aviat tactical milestones, right? Or let's say in the next six to nine months, we need to deliver the next generation project or product and we're on track for that. And really right now it's working out our fixed wireless with the customer's back office and everything else that's in the overall stack in delivering fixed wireless to apartment buildings. So we feel really good and we think that our microwave system engineering is really winning the day versus the competition there. You know, with respect to, you know, what Nokia announced on Capital Markets Day back in November of 2025, I think the playing field is level between everyone who's listening on the call that that That announcement has happened and we know very little beyond that. The Insigo purchase of fixed wireless access would suggest that Nokia is executing on the announcement that they made in the back of November, but I don't have anything further to add with respect to their intent to execute on the microwave portion. And the other part of your question is, what is it doing in the competitive landscape? You know, I don't know if and when it will come for sale. I would say Aviat and Aviat's competitors are very engaged in developing alternatives should that property be trade or should that property become commercial. let's say, neglected within the portfolio of Nokia. So I don't know what's going to happen with respect to sale. I do know that we and our competitors are active in terms of trying to make sure that the customer base has microwave solutions.

Q: Pete, just to follow up on our previous answer, you mentioned an issue in India was related to jet fuel, and I was wondering, are these issues related to simply you or your customers getting around, or is it trying to avoid a conflict zone?

A: It's trying to move stuff. You need to have jet fuel to move. And that's, you know, the comment about freight inflation is tied to the constriction and supply of jet fuel. And that was a headline I wrote from India. But where does it really show up? It shows up in our freight costs.

Q: And my other question is, there was an executive order about the Defense Production Act amended for the grid infrastructure, and I was wondering if that is going to drive some private network business at the utilities, and by extension, if that would also drive some private network business to the AI data centers.

A: I think, yeah, so the Defense Product Act, it was, you know, recently a presidential executive order to push the modernization of the grid. I don't believe that that was for data center or AI. It was just because the country has not focused enough on the core grid and reducing bottlenecks and the grid expansion and resilience. And what we see from that is it didn't call out microwave or critical communications, but as the modernization push happens, we see an increased ramping grid builds. Our pipeline of utility opportunities is increasing. And as the utility yard gets bigger, the need to extend the microwave coverage goes up. Then also in that executive order, there was a focus on national defense and foreign supply risks. You know, we are Build America, Buy America compliant. We're the only microwave company headquartered in North America. Our utility business is approaching, you know, it's slightly under 10%. So we think that this national focus is going to pay dividends for us going forward.